WEAKNESSES

Competitiveness subject to dollar movements due to fully dollarised economy

Large informal sector and low-skilled workforce

Legacy of sovereign default

State interventionism

Low levels of domestic and foreign private investment

Risk assessment

Growth remains hobbled by the decline in public support

Growth will continue to slow in 2019, held back by continued fiscal consolidation and persistently sluggish domestic demand. As financing conditions for the deficit grew tighter, the government was forced to draw up a fiscal consolidation plan in 2018 to reassure the markets. Under this plan, the government will slash investments and eliminate civil servant positions in 2019. In addition, interventionism and a lack of competitiveness (high cost of public services, rigid labour market), exacerbated in recent years by dollar appreciation, have lessened the draw for private investors.

Household consumption is expected to remain constrained by the weak growth in purchasing power linked to the wage freeze and the rise in the unemployment rate, which will nevertheless remain low. Moreover, with the informal sector accounting for 45% of employment, many households do not receive the minimum wage and full social benefits.

After a period of deflation due to the appreciation of the US dollar and the wage freeze, prices will rise slightly again in 2019, driven by reduced fuel subsidies and stabilisation of the dollar. In addition, oil sales should benefit from firm prices, even if production is unchanged at Petroamazonas, the national company that accounts for 78% of national production. Conversely, cocoa producers will be hard hit by the entry into force of a European standard imposing a maximum content level for cadmium, a substance which is very present in local cocoa. Other agricultural products, including bananas, shrimp, canned fish and flowers, will be hurt by cooler European and North American markets. Manufacturing sectors will continue to be penalised by their lack of competitiveness outside the dollar zone. However, at the same time, imports will be sluggish, in line with domestic demand, allowing external trade to make a slightly positive contribution to growth.

Fiscal consolidation to control soaring debt

President Lenín Moreno has launched a fiscal consolidation plan that will generate estimated total savings of USD 1 billion, or 1% of GDP. The aim is to reduce the deficit sufficiently to contain the country’s debt, which has risen sharply since 2012, exceeding the statutory limit of 40% of GDP. Measures include the obligation to use tenders for public contracts (USD 400 million in savings), the phase-out of public jobs through mergers of state-owned entities (USD 350 million) and the removal of subsidies on premium gasoline (USD 150 million).

At the same time, the current account is expected to remain slightly in deficit. The trade balance will be impacted by expensive imports of petroleum products, due to insufficient refining capacities to meet growing domestic demand. The balance of services will also continue to show a small deficit, with freight and oil services paid abroad exceeding strong tourism revenues. In addition, growing debt interest and profit repatriation will exceed expatriate remittances from the United States and Spain. With weak FDI (0.6% of GDP in 2017) insufficient to cover the deficit, the government will have to resort to external debt, as in January 2018 (USD 3 billion). The authorities have limited room for manoeuvre, as reserves are very low (less than two months of imports in June 2018). However, the resumption of relations with the IMF since President Moreno came to power offers an additional option for lower-cost financing, at the cost of accelerated fiscal consolidation.

The President’s popularity wanes despite a successful referendum

President Moreno emerged stronger from the February 2018 referendum in the struggle with his predecessor Rafael Correa for control of their party, Allianza Pais (AP). An average of 68% of voters in the referendum backed a series of measures that set a limit of two presidential terms (a return to the pre-2015 situation that prevents Mr Correa from standing again in 2021), strip those convicted of corruption of their civil rights, reform the Consejo de Participacion Ciudadana y Control Social, the body that decides on judicial appointments and that was controlled by Correa's supporters, and restrict oil drilling in Yasuni Natural Park. Despite this victory, President Moreno's approval rating has declined steadily since peaking at 77% in August 2017, falling to 45% one year later, mainly due to the worsening economic situation. He also holds a slim legislative majority (74 seats out of 137), which is undermined by internal party dissensions.

The business environment remains weak, with significant difficulties in investor protection, default resolution and taxation. As a result, Ecuador came 118th out of 190 in the World Bank's Doing Business 2018 ranking.

Last update: February 2019

Payment

Cheques are still a frequently used means of payment for commercial transactions in Ecuador. Nevertheless, the use of cheques is declining, due to a growing preference for electronic payments for transactions of all values.

Credit transfers are used for both high-value and low-value payment transactions. High-value and urgent inter-bank transfers are usually cleared via the Banco Central Ecuatoriano (BCE). Inter-bank transfers can include capital, money and foreign exchange market transactions, as well as public sector and commercial payments. Transfer instructions can be submitted via paper-based instructions or through online systems such as SWIFT.

Cash is frequently used, particularly for low-value transactions.

Debt Collection

Ecuador’s judicial system comprises courts, administrative bodies, autonomous bodies and subsidiary bodies. The jurisdictional bodies responsible for administering justice are the National Court, regional courts, law courts, law tribunals and Justice of the Peace courts.

The Judicial Council is the governing body responsible for the administration, supervision and discipline of the judicial function. The judicial system also encompasses subsidiary bodies, such as notaries, auction services, foreclosure services, legal custodians and other bodies, as determined by law.

The Código Orgánico General de Procesos (COGEP), a new legal code in force since May 2017, should help to speed up procedures.

Amicable phase

Amicable negotiations are a crucial step in successful debt collection management. These negotiations are highly detailed and cover aspects including the number of instalments, write-offs, guarantees, collateral, grace periods and interest.

Legal proceedings

Under the new legal code, trials can be in the form of Executive Judgments or Ordinary Judgments.

Executive Proceedings

Executive proceedings are initiated by filing a written complaint with the Court. Supporting documents (such as the pagaré or letra de cambio) should be attached to the claim. Cases are assigned to a judge who then has 45 working days to decide whether the claim is complete. The judge then hands down precautionary measures within the following 90 days. The judge orders a single audience 120 days later, during which he delivers a sentence.

Ordinary Proceedings

Ordinary proceedings are initiated by filing a written complaint with the Court. The case is then assigned to a judge who has 60 working days to decide whether the claim is complete. The judge then issues a writ ordering the serving of the written complaint to the debtor. The debtor has 90 days to respond with a written defence. The judge then orders a single audience during which he will deliver a sentence.

Enforcement of a Legal Decision

A domestic judgment becomes final and enforceable after any appeals have been exhausted. The judge of the court of first instance is responsible for enforcing judgments and issues a writ of execution ordering the relevant party to comply with the judgment within five working days. If the order is not complied with within the five-day period, the judge orders the seizure of the debtor’s assets in order for them to be auctioned off.

The Ecuadorian Civil Procedure Code sets out the requirements for the enforcement of foreign judgments, in accordance with the appropriate treaties, international conventions and Ecuadorian law. The approval procedure begins with a phase of knowledge gathering (for ordinary trials) that is performed in the defendant’s domicile court before admitting the execution. Ecuador has signed and ratified a number of international treaties for the recognition and enforcement of foreign judgments, including the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards.

Insolvency Proceedings

There are two phases in Ecuador’s insolvency proceedings.

Conciliatory phase

The objective of this phase is to ensure that the debtor company can continue to operate, by putting into place signed agreements with all of its recognised creditors.

Bankruptcy

Bankruptcy proceedings entail the sale of the debtor company and its assets, with profits from the said sales being used to pay its debts to creditors.